Schafer: Ballmer's deal takes NBA values to new level

June 4, 2014 — 12:46am

Ted S. Warren &#x2022; Associated PressLongtime hoops fan Steve Ballmer was CEO of Microsoft Corp. in July 2011 when he cheered during a charity game. Last month he agreed to buy the Los Angeles Clippers for $2 billion.

The next major league sports team owner in Minnesota won’t be one of us.

Retired Microsoft CEO Steve Ballmer’s eye-popping, two-billion-dollar bid for the National Basketball Association’s Los Angeles Clippers not only resets valuations throughout an industry. It also makes it even more likely that new entrants to the ownership class in professional sports are going to be guys like him. And ­Minnesota doesn’t produce them.

A Michigan native living near Seattle, Ballmer’s not a lifelong fan of the Clippers or a pillar of the local community, if there is such a thing in a metropolis like greater Los Angeles.

It’s easy to think of Ballmer as some sort of exception. After all, this is a guy known as Monkey Boy for having bounded all over the stage at Microsoft events. And his is the rare case of a billionaire who made his money on corporate stock options while working as an employee, not by owning or starting a company.

Yet he’s utterly representative of the new type of NBA owner, someone who suddenly became very rich and decided he just had to own an NBA team, and it didn’t really matter which one.

He’s also not the only software industry executive new to the NBA. The group that just bought controlling interest in an NBA franchise for what was then a record high valuation — $534 million for the Sacramento Kings — was led by Tibco Software Chairman and CEO Vivek Ranadivé.

Ranadivé isn’t a Sacramento local hero any more than Ballmer is in Los Angeles. Ranadivé made a name for himself in business as a Silicon Valley entrepreneur. He made a name for himself in the sport as a volunteer coach of his daughter’s team of middle-schoolers.

It’s important to understand, however, that NBA valuations were already remarkably high even before these recent deals. A 2012 report produced by the investment firm W.R. Hambrecht noted that recent NBA average team value as a multiple of annual operating income was up to 67.4 times.

That’s maybe 10 times what reasonable investors would pay for ABC Manufacturing or Acme Distributing Co. Then came Ballmer’s deal, which works out to something like 133 times estimated operating income.

The other new players to the NBA ownership game who seem willing to pay these kinds of prices are deal guys from the business of private equity investing.

What’s most interesting here, of course, is that they likely amassed their fortunes by having the discipline to buy good assets at less than six times operating income.

In Milwaukee, Wes Edens and Marc Lasry just acquired the Bucks for at least $550 million, with the new owners pledging an additional $100 million to replace the substandard arena.

They are co-founders of two similar private capital management firms, with Lasry best known for his success buying distressed debt. Both work in New York.

In Philadelphia the NBA team was sold in 2011 to an ownership group led by a New York private equity manager. The principal owner of the Detroit Pistons is another one, from Los Angeles. At least the Pistons’ new owner grew up in Michigan.

Given sky-high valuations and the prevalence of finance and technology billionaires in this new class of pro sports owners, Nate Silver, of FiveThirtyEight blog fame, estimated NBA franchise value based in part on the number of local billionaires, as identified by Forbes in its annual list of the 400 wealthiest Americans.

Silver’s work suggested that the value of the NBA franchise in the Twin Cities would be held down by a contraction in a number of locals on the Forbes 400, from 10 in 2004 to just four on the last list. Several of the 2004 class are now deceased, and Forbes decided that Richard Schulze of Best Buy Co. was a resident of Florida.

But Silver’s thinking seems flawed in several ways, not least of which is that the new crop of NBA owners seem to regard an NBA city like Milwaukee as just another town in which they own a costly asset, kind of like buying a portfolio company or maybe a fourth home to take the family on weekends.

The prospective buyers can’t just be billionaires, either. They have to be the kind of people who think using much of their wealth to buy a company at more than 130 times operating income is a fine idea because it would be so darn much fun.

That’s the kind of billionaire this area seems to lack.

The retired CEO of Cargill, Whitney MacMillan, is one of the Twin Cities residents on the most recent Forbes 400 list. It’s difficult to picture a statesman like MacMillan elbowing himself to the front of the TV cameras after a championship game to spray Cristal champagne on his highly paid employees.

It’s not that easy to imagine Glen Taylor doing that, either, but the game has changed since Taylor bought control of the local NBA team back in the 1990s.

Taylor has always had partners in the Timberwolves, and he has explored finding a sizable minority partner who would eventually become the principal owner. What was a good plan in 2012 that didn’t quite come together is now, thanks to Ballmer, a great plan.

The Twin Cities is a bigger media market than Sacramento and a far bigger one than Milwaukee. And Forbes valued the T-Wolves higher than the Bucks before the recent eye-popping deals.

It will be interesting to see if Taylor manages to sell a one-third interest for north of $200 million. If he does, we already know the buyer won’t be anyone we recognize.

Lee Schafer came to the Star Tribune after 15 years as a corporate officer, consultant and investment banker in the Twin Cities. He has been a columnist for Twin Cities Business magazine and was senior editor for Corporate Report Minnesota. Follow @LeeASchafer